Q: Should I open a Roth IRA account?I enrolled in Roth TSP. But I did some research and there are lots of peo­ple say­ing that I should max out a Roth IRA before I con­tribute to TSP due to the fact that the fed­eral gov­ern­ment doesn’t match up in TSP, so it makes more sense to con­tribute to IRA where it has more flexibility.

–Songling, U.S. Army

A: Hats off for sign­ing up for the Roth TSP! I think both the Roth TSP and Roth IRA have a lot to offer when it comes to the retire­ment sav­ings game. Before the Roth TSP became an option last year, many peo­ple felt like the Roth IRA was a great “first” place to start sav­ing for retirement…primarily, because of the poten­tial tax-free nature of the Roth IRA. The arrival of the Roth TSP at least lev­eled the play­ing field. Let’s look at the two options in a bit more detail.

First, I’ll explore the case for the Roth TSP. There’s no deny­ing it’s easy. Just sign up at myPay and you’re off and run­ning. Every time you get a pay raise or pro­mo­tion you can quickly go in and bump up your con­tri­bu­tion. It’s also very inex­pen­sive. Believe it or not, it is dif­fi­cult if not impos­si­ble to dupli­cate the low cost asso­ci­ated with the invest­ment choices within the TSP. It also has a unique invest­ment option in the “G Fund.” This is a guar­an­teed invest­ment option that pays inter­est based on out­stand­ing trea­sury secu­ri­ties. Finally, you can con­tribute a lot more into the Roth TSP than into a Roth IRA ($17,500 vs. $5,500 in 2013 assum­ing you’re under age 50).

All that being said, the Roth IRA also has its advan­tages. First off, you have a much wider selec­tion of invest­ment choices. The TSP is lim­ited to the 5 core invest­ment options and the tar­get retire­ment date funds (L Funds) that allo­cate among those 5 core invest­ments. With a Roth IRA, you can select from thou­sands of dif­fer­ent invest­ments. For many, this might be more hurt­ful than help­ful, but if you’re inter­ested in invest­ing in a spe­cific stock or a type of mutual fund not cov­ered by the TSP choices it could tip the scales. The Roth IRA is also a bit more acces­si­ble than the Roth TSP. The IRS allows you to remove con­tri­bu­tions from the Roth IRA at any­time with­out taxes or penal­ties. So, if you con­tribute $5,000 a year to a Roth IRA for five years, you would have $25,000 that you could access, for what­ever pur­pose, with­out taxes or penal­ties (though I’d most often pre­fer to see peo­ple leave that money alone for retire­ment). Penalty-free access to con­tri­bu­tions is not allowed with the Roth TSP.

In a finan­cial planner’s per­fect world, you would be able to do both, but given the lim­ited nature of what’s avail­able from pay­check to pay­check hope­fully this helps you make the right call for your spe­cific sit­u­a­tion. You’ve already taken the hard­est step: Get­ting started. Good job and good luck.

Regard­less of which option you choose, make sure you take full advan­tage of any match. That is a 100 per­cent return on your money! Next, make sure you invest 15 per­cent of your gross pay into retire­ment vehi­cles. That being said, I would not invest a penny into retire­ment until you have paid off all debts (less a mort­gage) and have a fully funded emer­gency account of 3–6 months of liv­ing expenses. For most fam­i­lies, this would be around $10,000 to $15,000.

USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. The information is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional representation before acting on any information you may have found in this article. This article is in no way attempts to provide advice that relates all personal circumstances.

Examples given are hypothetical illustrations and not an indication of the benefits or features of any USAA product. You should seek policies and advice based upon your own particular circumstances. Sample loans are for illustration purposes only and are not a rate quote, pre-approval, or commitment to lend.

Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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About the Author

Joseph “J.J.” Mon­ta­naro is a CERTIFIED FINANCIAL PLANNER™ prac­ti­tioner at USAA with more than 19 years of expe­ri­ence in the finan­cial ser­vices indus­try. JJ also served in the U.S. Army for six years on active duty, and in 2009, he retired as a lieu­tenant colonel in the U.S. Army Reserve.